Nigeria's central bank chief said Friday that he won't raise interest rates to counteract inflation driven upward by the end of a fuel-subsidy program, as violent insurgents and a weak global economy threaten growth in one of Africa's most dynamic economies.
"The removal of subsidies will have an impact on inflation, that's a foregone conclusion," Central Bank of Nigeria Governor Sanusi Lamido Sanusi told Dow Jones Newswires. "But is a response an increase in rates? No."
The central bank raised its main interest rate six times last year to the current rate of 12%, a record high. Sanusi said the bank would probably stand by that rate through this year, even as the inflation rate, currently at 12.6%, moves toward an estimated high of 14.5% in the third quarter of this year before creeping back into the single digits by the end of 2013.
The International Monetary Fund has endorsed that strategy, saying this week that global turmoil and the fallout from increasingly violent attacks by the militant sect Boko Haram are a greater threat to Nigeria's economy than inflation.
Inflation is rising mostly because the government in January cut a popular fuel-subsidy program by 50%, sending the cost of gasoline sharply upward.
President Goodluck Jonathan at first announced that the subsidy would be scrapped entirely. But labor unions responded with widespread protests that brought the economy to a standstill in Lagos, the commercial capital, and other important cities, and Jonathan agreed to restore half of the subsidy. He has pledged to withdraw the remainder eventually.
In a wide-ranging interview during an investment conference here, Sanusi said Jonathan was right to cut the subsidy and to pledge further reductions. The government needs the money to invest in Nigeria's dilapidated power grid and roadways, Sanusi said. He a drew a parallel between the government's work to reinvigorate Nigeria's infrastructure and the efforts by European governments to wean citizens off unsustainable social programs.
"The Greeks are burning Athens. In Britain when school fees were reduced, students burnt London. Everywhere in the world where you have austerity measures you have a response," Sanusi said. "I'm not sure there is any kind or pre-announcement or preparation that would make it less painful for people to pay more for fuel."
Jonathan was right to introduce the subsidy even in the face of mounting insurgency by the Islamic militant group Boko Haram, Sanusi said, adding that their increasingly brazen attacks wouldn't dissuade investors or the government's revitalization plans.
"People invest in Afghanistan. People invest in Iraq. People invest in war zones. So it's really about assessing the risk," Sanusi said. "The solution to the problem is to have that economic regeneration of [northern Nigeria] and create jobs and create opportunities for people."
After announcing last autumn that Nigeria intended to hold some of its reserves in Chinese renminbi, Sanusi said the bank now holds about $500 million in the currency, some 1.4% of its total reserves. "I think that we would gradually increase our renminbi holdings" to around 10% of the bank's total, Sanusi said, largely by decreasing its holding of euros.
"This is not a policy decision, but there could be the possibility of even, for instance, renminbi payments for oil sales to China to generate the renminbi cash flows that will be used to sell this Chinese debt and also raise money from China," Sanusi said. He added that U.S. dollars will continue to make up the bulk of the bank's reserves.